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CCP calls for review of LNG contract prices

The commission said the long-term LNG agreements ensure supply security, but it shooed away price advantage especially when global LNG market has seen a supply glut.

By Our Correspondent
November 16, 2018

ISLAMABAD: Anti-trust watchdog Competition Commission of Pakistan (CCP) on Thursday called for revising of the sales-purchase agreements vis-à-vis liquefied natural gas (LNG) in order to allow pricing review of the two long-term fuel import deals.

The CCP said state-run Pakistan State Oil (PSO) and Qatargas have a 15-year long term sales-purchase agreement (SPA) under the government-to-government agreement between Pakistan and Qatar. Likewise, Pakistan LNG Limited (PLL) and Italian energy firm ENI also have a long-term SPA for 15 years. In both the SPAs, the contract price review is after 10 years.

The commission said the long-term LNG agreements ensure supply security, but it shooed away price advantage especially when global LNG market has seen a supply glut, leading to fall in natural gas prices in the trading hubs.

CCP said the country’s LNG SPAs are indexed to Brent prices, which are on the recovery mode and that entails higher LNG delivered ex-ship (DES) price for the importer. This is “contrary to the globally-traded natural gas prices”.

“In the face of global oil market volatility, some of the features of the standard SPAs like ‘take or pay’ and ‘contract price review’ need to be revisited,” it added. “These features are seen to be restrictive and potentially divergent from market forces of demand and supply.”

The commission said disparity between contract and competitive prices could be lessened if prices are reviewed. DES pricing arrangements need to be periodically negotiated “to procure the most competitive deal”.

CCP said the ‘slopes’ should be re-negotiated to obtain a relatively competitive price as the Brent price is on the upward trend.

“If the slope in the DES price is set at 16.7 percent, LNG price is equal to that of crude oil on an energy equivalent basis. A slope less than 16.7 percent implies that LNG is sold at a discount to oil, and slopes greater than 16.7 percent imply that LNG will sell at a premium price to oil,” the commission said.

“Pakistan’s two long-term contracts have slopes set at 13.37 percent (PSO and Qatargas) and at 11.62 percent (PLL and Eni for year 1 and 2).”

CCP said LNG importing countries are already renegotiating the DES price to a lower slope due to upward trend global Brent prices.

“With the present rising Brent prices, a price ceiling may help lower prices for LNG buyers like Pakistan and in turn lead to greater consumer (buyers/importers) welfare as compared to a constant slope model currently employed.”

The LNG received at Port Qasim is re-gasified at the Engro Elengy Terminal Limited and Pakistan Gasport Consortium Limited terminals at the tolling tariff of $0.479/million metric British thermal unit (mmbtu) and $ 0.4177/mmbtu, respectively, approximately $250,000/per day.

“For efficient utilisation of both these terminals it is recommended that their capacity must maximally be utilised,” the CCP said.

“As under the 15-year contracts negotiated with the terminals the tolling tariff is fixed at the above mentioned rates.”

Additionally, the Port Qasim Authority charges $600,000/LNG vessel. The port charges are factored in re-gasified liquefied natural gas prices for end-consumers. PSO pays $280,000, while Qatargas pays $320,000 out of the total port charges. Likewise, PLL pays $100,000 and Eni pays $500,000 as port charges.

PSO procures six cargoes each month – five under the long-term SPA and one under the term tender with Gunvor adding up to 600 million metric cubic feet/day of gas. PLL procures 2-3 cargoes under both long term contract for 15 years with ENI and a term tender with Gunvor.